JAPAN IS TRAPPED AND EVERY OPTION MAKES IT EVEN WORSE
Japan spent roughly $88 billion in two days defending the yen. USD/JPY hit 155.2, and it is already back above 159.
That $88 Billion intervention bought them just three days.
Bond yields are making it even worse.
The 2-year and 5-year both hit 31-year Highs.
Weak currency + high bond yields is a problem no country can afford.
A weak yen makes every import more expensive, and Japan buys almost all its energy in dollars. Rising yields make borrowing more expensive for every Japanese business at the same time.
It gets worse for the financial system. Japan's four largest insurers are already sitting on ¥14.5 trillion in unrealised bond losses, roughly $91 billion.
Every rise in yields makes that number bigger.
Now the BOJ looks set to hike in September.
Reuters reported yesterday that at least three of nine board members argued for faster rate increases at the July meeting.
Sources say the intervention and pressure from Bessent have all but locked in a September move.
A hike pushes Japanese yields higher still, which deepens the losses on bonds already held and raises borrowing costs further.
And there is a second much worse effect.
Higher Japanese yields narrow the gap between US and Japanese rates. That gap is what makes the yen carry trade profitable.
Traders borrow yen cheaply and buy higher-yielding assets abroad.
Narrow the gap and the trade stops working. Positions get closed, and closing them means selling.
Every direction the BOJ turns creates a new problem somewhere else.
Credit: Bull theory
Japan spent roughly $88 billion in two days defending the yen. USD/JPY hit 155.2, and it is already back above 159.
That $88 Billion intervention bought them just three days.
Bond yields are making it even worse.
The 2-year and 5-year both hit 31-year Highs.
Weak currency + high bond yields is a problem no country can afford.
A weak yen makes every import more expensive, and Japan buys almost all its energy in dollars. Rising yields make borrowing more expensive for every Japanese business at the same time.
It gets worse for the financial system. Japan's four largest insurers are already sitting on ¥14.5 trillion in unrealised bond losses, roughly $91 billion.
Every rise in yields makes that number bigger.
Now the BOJ looks set to hike in September.
Reuters reported yesterday that at least three of nine board members argued for faster rate increases at the July meeting.
Sources say the intervention and pressure from Bessent have all but locked in a September move.
A hike pushes Japanese yields higher still, which deepens the losses on bonds already held and raises borrowing costs further.
And there is a second much worse effect.
Higher Japanese yields narrow the gap between US and Japanese rates. That gap is what makes the yen carry trade profitable.
Traders borrow yen cheaply and buy higher-yielding assets abroad.
Narrow the gap and the trade stops working. Positions get closed, and closing them means selling.
Every direction the BOJ turns creates a new problem somewhere else.
Credit: Bull theory